November 2004
K-12 Interview: This month K-12 Newsletter talks to Baran Rosen, president of Whitestone Communications.
K-12: How would you describe Whitestone Communications?
Rosen: Whitestone Communications specializes in representing buyers and sellers of publishing, information and training companies across the information/media spectrum— books, newsletters, magazines, database businesses—and across different subject areas, including education, but also legal healthcare, engineering and other major areas.
K-12: In terms of your own background, what got you into the M&A business?
Rosen: I was working as an editor and got involved in trying to be a magazine. I was not successful in the purchase, but I worked with an M&A advisor and I thought what he did was pretty exciting. So I decided to pursue it.
K-12: How long have you been at it now?
Rosen: Almost 20 years in M&A, with eight years in total with McGraw-Hill and Simon & Schuster corporate development helping them buy and sell companies. And then 10 years running Whitestone.
K-12: What kind of changes have you seen over the years? Have there been years where there’s been a lot more activity than others, or has it been steady?
Rosen: In terms of level of activity, we had a great run from 1994 on through the dot-com period. Of course, the dot-com bust and the recession put a hole in that. The market is just this year getting back to a more active pace.
K-12: What are buyers in K-12 looking for now, and has that changed over the years?
Rosen: I began my work on education deals about four years ago. I’d say the major areas of interest have been supplemental. Within supplemental, there’s a great interest in test prep types of product, but also in the basics, such as Saxon, the basic and basic reading, the subjects having the strongest market. There’s an increased interest in the software that helps schools in tracking their scoring and helps teachers monitor student performance.
K-12: What are sellers looking for and has that changed over the years?
Rosen: Sellers in supplemental tend to be divided into two parts: those who were in the library field and those who weren’t. Those not tied to the library market have been able to maintain or improve results. They can feel more comfortable in terms of considering a sale, because their results have been at least somewhat attractive. A lot of the people in the library market got hurt badly and can’t consider a transaction unless they get their numbers back up to better levels.
K-12: What differences are most obvious between selling a big and small company?
Rosen: Generally it’s the largest companies buying the smaller, independent companies. That accounts for 80% of the deals done. The major companies are always trying to see what they can pick up.
K-12: In the K-12 market, does the level of M&A activity correspond to the market size and growth? While 2002 and 2003 were not great years, for example, the first half of 2004 showed some definite pick-up. Have you seen any parallel in your field?
Rosen: Absolutely. It’s been directly parallel. M&A activity this year has followed the stock market in lock step. The stock market was going up for the first half of the year, and the acquisition activity went right along with it. Then the stock market leveled off in the third quarter and M&A has leveled off. The increase that began in the first half is not continuing in the second half. It’s not necessarily falling back to what it was in 2003, but it’s been kind of flat. On the whole, I think 2003 will be a better year than 2003 on the strength of the first half alone.
K-12: Consolidation in the industry is very obvious. Is this pretty much like any industry or is it more so in publishing?
Rosen: There’s definitely been a lot of consolidation. You also have private equity groups backing people like Haights Cross, Wicks Group and WRC Media to buy supplemental publishers. McGraw-Hill buying the Tribune Group indicated that it really wanted to play in this area. Pearson just bought Dominie, and Reed Elsevier bought Saxon. So there are strong appetites. Education is always going to be there, an dit ahs good fundamentals for the long term.
K-12: Let’s say the seller is the smaller entrepreneurial owner, what do you advise him to expect in this marriage with a bigger company?
Rosen: Some companies thrive through different corporate owners, such as Carson-Dellosa. So in some cases it can work, but in others some entrepreneurs find it really difficult to exist in an environment that requires public reporting and they just want to sell and get out.
K-12: What does foreign ownership, as in the cases of Pearson and Harcourt, mean for the industry?
Rosen: The U.S. is the world’s largest market. Both Pearson and Harcourt are owned by parent companies with an interest in publishing. They are trying to strategically think about what the good long-term areas are. Certainly education stands out. We don’t have any rules that bar people from owning our educational publishing companies, so it’s all fair game for them.
K-12: Would you expect more foreign buyers coming in?
Rosen: I think it will be opportunistic. If there were a major division to be put on the market for example, it would attract interest because of its size. I don’t see any new players on a proactive basis, but I can see them responding as deals come up.
K-12: How long would you think the financial buyers would typically like to hold on a property like Houghton Mifflin?
Rosen: As the controversy over No Child Left Behind continues to grow, any changes that would do away with that law would be most significant. It seems like all the schools and publishers chasing behind them are all going in one direction on NCLB. Democrats might put more funds into post-school programs and other supplemental education. But overall, I don’t think the major dynamics will change.
K-12: Is there anything that could happen in education that would make a significant difference in getting people more interested in owning K-12 properties?
Rosen: We’ve spent our time working with buyers and the other half working with sellers. So we’re able to help companies on the buy side focus on putting together a successful acquisition program. The best example of that was our work with Haights Cross, where in five or six years we represented them on five acquisitions at a total value of about $100 million.
K-12: Where do you see Whitestone five years from now in terms of emphasis and activity?
Rosen: You’re only as good as the last deal, so it’s on to the next one. It’s always interesting to see certain companies come through as winners on certain properties, and that most companies are at least somewhat disciplined in their approach to acquisitions. You don’t have any one buyer who tends to always win the processes. Pearson won the auction to buy Dominie. Wicks won the auction to buy Educators Publishing Service. Reed got Saxon by keeping the competition away. You always have people striving to do deals. But it’s interesting that with people all taking the same set of numbers, the same look at the market and making different valuations, one case allows one company to win and another allows someone else to win.
K-12: What does determine the valuation of a company these days?
Rosen: The large companies project out the cash flow that they’re going to get from an acquisition over a five-year period. They also project out the value the acquisition will have at the end of the five years. And then they discount those back at their hurdle rates, usually in the 15%-18% range. This is how they come up with their valuation on an official basis. On an unofficial basis, if the management is in the good graces of the higher ups it can secure extra dollars for an acquisition, and they re-run the model to match the higher numbers.
K-12: What is the method for a seller to estimate the valuation of his company?
Rosen: If the business is less than $10 million in revenue and has got a 15% profit margin growing at some modest amount like 5% a year but has good titles and content in one of the broader areas, then the multiple might be in the range of 7-8 times cash flow. The multiple drops with revenues of less than $5 million.
K-12: What do your clients get when they select Whitestone as their M&A advisor?
Rosen: What a seller wants in an M&A advisor is someone who is realistic and can tell them up front what the valuation is going to be so that they’re not surprised about the offers they’ve received and that they have the right level of expectation on the price. Some intermediaries may look to inflate the expectations to secure the assignment. But I believe in giving sellers as realistic a picture as possible. My motto in working on transactions is “no surprises”.
This article is reprinted with permission from The K-12 News Report, Copyright November 2004
